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Economics 4 & 5 with corrections

1.
Chapters 4 & 5: Supply and Demand

2.
4-1: What is Demand? <ul><li>Microeconomics is the part of economic theory that deals with the behavior and decision making by individual units, such as people and firms. </li></ul><ul><ul><li>Microeconomic concepts help explain how prices are determined. </li></ul></ul><ul><li>Demand is the desire, ability, and willingness to buy a product. </li></ul><ul><li>Demand is a concept specifying the different quantities of an item that will be bought at different prices. </li></ul>

3.
<ul><li>The Law of Demand : </li></ul><ul><ul><li>There is an inverse relationship between the price of an item and the quantity demanded. </li></ul></ul><ul><ul><li>As price goes up, the quantity demanded will go down. </li></ul></ul><ul><ul><li>As price goes down, the quantity demanded will go up. </li></ul></ul><ul><li>Marginal Utility is the additional satisfaction or usefulness a consumer gets from having one more unit of a product. </li></ul><ul><li>Diminishing Marginal Utility states that the extra satisfaction we get from using additional quantities of the product begins to decline. </li></ul><ul><ul><li>“ How many cars do you really need?” </li></ul></ul>

4.
<ul><li>Demand Schedule – table that lists how much of a product consumers will buy at all possible prices </li></ul><ul><li>Demand Curve – a graph showing the quantity demanded at each and every price that might prevail in the market </li></ul>(graphs in motion) Price Quantity Demanded $30 0 $25 1 $20 1 $15 3 $10 5 $5 8

5.
4-2: Factors Affecting Demand <ul><li>When it comes to demand, there are two types of changes </li></ul><ul><ul><li>When the price of a product changes while all other factors remain the same , there will be a change in the quantity demanded . </li></ul></ul><ul><ul><ul><li>Price of hamburger decreases at McDonalds, people will buy more hamburgers. </li></ul></ul></ul><ul><ul><li>Sometimes when other factors change while the price remains the same , there will be a change in demand. </li></ul></ul><ul><ul><ul><li>If McDonalds redesigns its restaurants to appeal to more people, they will have more customers. </li></ul></ul></ul>

6.
<ul><li>Change in Quantity Demanded </li></ul><ul><li>Caused by a change in price </li></ul><ul><li>Graphically represented by a move along the demand curve </li></ul><ul><li>Income effect – the change in quantity demanded due to the change in a buyers real income </li></ul><ul><ul><li>Price goes down, you spend less, you “feel” richer, you buy more. </li></ul></ul><ul><li>Substitution effect – the change in quantity demanded due to a price change that makes other products more or less costly </li></ul><ul><li>Change in Demand </li></ul><ul><li>Caused by a change in factors other than price </li></ul><ul><li>Consumers decide to buy different amounts of the product at the same prices </li></ul><ul><li>Graphically represented by a shift of the demand curve, giving an entirely new demand curve (graphs in motion) </li></ul><ul><li>Can be caused by changes in: </li></ul><ul><ul><li>consumer income </li></ul></ul><ul><ul><li>consumer tastes (trends) </li></ul></ul><ul><ul><li>cost of substitutes </li></ul></ul><ul><ul><li>cost of complements </li></ul></ul><ul><ul><li>consumer expectations </li></ul></ul><ul><ul><li>number of consumers </li></ul></ul>

7.
4-3: Elasticity of Demand <ul><li>Elasticity is a measure of responsiveness. </li></ul><ul><ul><li>“ cause and effect” </li></ul></ul><ul><ul><li>how much does a dependent variable respond to a change in the independent variable </li></ul></ul><ul><ul><li>How much does the quantity demanded respond to an increase or decrease in price? Depends on its elasticity. </li></ul></ul><ul><li>Demand is elastic when a change in price results in a relatively larger change in quantity demanded. (m<-1) </li></ul><ul><li>Demand is inelastic when a change in price results in a relatively smaller change in quantity demanded. (m>-1) </li></ul><ul><li>A product is unit elastic when a change in price results in a proportional change in quantity demanded. (m=-1) </li></ul>

8.
<ul><li>Some determinants of Elasticity </li></ul><ul><ul><li>Can the purchase be delayed? </li></ul></ul><ul><ul><li>Are adequate substitutes available? </li></ul></ul><ul><ul><li>Does purchase use a large portion of income? </li></ul></ul>Type of demand Elastic Inelastic Unit Elastic Change in Price Down Down Down Change in quantity demanded Up Up Up Change in expenditures (price times quantity) Up Down Same

9.
5-1: What is Supply? <ul><li>Supply is the amount of a product that would be offered for sale at all possible prices that could prevail in the market </li></ul><ul><li>The Law of Supply : </li></ul><ul><ul><li>There is an direct relationship between the price of an item and the quantity supplied. </li></ul></ul><ul><ul><li>As price goes up, the quantity supplied will go up. </li></ul></ul><ul><ul><li>As price goes down, the quantity supplied will go down. (graphs in motion) </li></ul></ul>

10.
<ul><li>Change in Quantity Supplied </li></ul><ul><li>Caused by a change in price </li></ul><ul><li>Graphically represented by a move along the supply curve </li></ul><ul><li>Change in Supply </li></ul><ul><li>Caused by a change in factors other than price </li></ul><ul><li>Producers offer different amounts of the product to sell at the same prices </li></ul><ul><li>Graphically represented by a shift of the supply curve, giving an entirely new supply curve </li></ul><ul><li>Can be caused by changes in: </li></ul><ul><ul><li>cost of resources, productivity, technology, expectations </li></ul></ul><ul><ul><li>taxes and subsidies, government regulations </li></ul></ul><ul><ul><li>number of sellers </li></ul></ul>

11.
Supply is elastic when a change in price results in a relatively larger change in quantity supplied. (m<+1) Supply is inelastic when a change in price results in a relatively smaller change in quantity supplied. (m>+1) A product is unit elastic when a change in price results in a proportional change in quantity supplied. (m=-1)

12.
5-2: Theory of Production <ul><li>The production function shows how total output changes when the amount of a single variable (usually labor) changes over the short run. </li></ul><ul><li>The marginal product is the extra output or change in total product caused by adding one more unit of variable input. </li></ul><ul><li>Can be illustrated with a production schedule or graph </li></ul><ul><li>(graphs in motion) </li></ul><ul><li>Stages of Production </li></ul><ul><li>I. Increasing marginal returns </li></ul><ul><li>- Each additional worker adds more to the total output than the worker before. </li></ul><ul><li>II. Decreasing marginal returns </li></ul><ul><li>- Each additional worker is making a diminishing, but still positive, contribution </li></ul><ul><li>III. Negative marginal returns </li></ul><ul><li>- Each additional worker decreases total output </li></ul>.

13.
5-3: Cost, Revenue, and Profit Maximization <ul><li>Fixed Costs or Overhead - costs that an organization incurs even when there is little or no activity, usually machinery and capital resources </li></ul><ul><li>Variable Costs – costs that change when the business’s rate of production or output changes, usually labor and raw materials </li></ul><ul><li>Total Costs – sum of the fixed and variable costs </li></ul><ul><li>Break-Even Point – level of production that generates just enough income to cover its total operating costs </li></ul><ul><li>Total Revenue – all the revenue that a company receives </li></ul><ul><li>Marginal Revenue – additional revenue a company receives from the production and sale of one additional unit of output </li></ul>